«My property is worth far more than what I would be offered for it at the moment. In other words, I won’t be able to sell it at that price until the crisis is over, and so I have no choice but to wait for the property market to recover to normal levels.».
No doubt many readers will recognise themselves in this pithy phrase. And we say ‘pithy’ because it could perfectly adorn the tomb of their wealth growth. Our longest-standing clients enjoy a very balanced mix of property and cash, tailored to their needs and PGR. However (or before this is implemented), we are going to try to correct certain conceptual and strategic errors via this blog, just as we do personally with new clients who come to our family office with this property burden:
- Firstly, our properties are not worth more than what the market is willing to pay us today by them. This is the market price, and no other price we might have moored in our memory (just like the anchor effect (as defined by Fernan2 in the stock market). We may also be misled by the mental anchor we may hold onto regarding the expected capital gain at the time of purchase. This universal law of market price, determined by supply and demand, is particularly difficult to accept when it comes to our own property, especially when it accounts for virtually our entire wealth. But even if we are reluctant to accept it, the market continues to dictate its universal laws.
- Secondly, whilst it is obvious that the market was overvalued, we must be aware that it may be many years before it becomes so again. The bursting of a bubble does not necessarily mean that another will immediately begin to form, and it is even less likely that it will do so in the same sector. The level we consider «normal» (sic) may be a long way from the value the market is likely to assign to our properties in the coming years or decades.
- Thirdly, the growth of our wealth cannot be put on hold and allowed to suffer until the next property bubble has inflated enough for us to feel that our properties are being bought up by others «at its usual price«. We must not let a long and precious period of time and opportunities slip away, so that we can free up our assets and put them towards other investments.”.
The potential realised profit or loss that we will incur if we decide to sell our properties today at current market prices must be fully offset and more than made up for by the returns we will obtain from other investments made with the proceeds of those sales. And this capitalisation on opportunities, much like compound interest, will prove spectacular by the time our properties have regained a market value that we consider «normal». Therefore, the state of our assets at that future point in time when we deem it acceptable to sell our properties would be far worse than what we would have achieved by selling today at market prices and putting our assets to work during those same years.
The show must go on (lyrics). Our assets must continue to perform well, without the long and severe property slump derailing our progress for years to come. As is always the case – and as we never tire of repeating – times of change, crisis, bursting bubbles, and so on… always come with the best investment opportunities. And we must be able to identify and capitalise on them, either on our own or with professional help. But in order to make the most of them, we must at the same time resolve to accept the market price for our properties so that we can begin the road to recovery. This path will be multifaceted and complex, and the worst mistake we can make in terms of building our wealth is to rule out selling, give up and fall into a pessimism about the property market which, let’s not kid ourselves, would be a very a long and fruitless penance.
Here’s one of the most moving posthumous videos from Freddie Mercury. Who better than him to remind us that the show must go on. That our wealth must continue to grow and that we must make the most of the opportunities that arise, despite the distress caused by past and present mistakes. If, to achieve this, we need to convert some or all of our property into cash at market prices, then we must do so. Let us think of the profits we can make with that money and not allow ourselves to be blinded by the capital losses we will incur. The opportunity cost The cost of resigning ourselves to a loss in the property market by pricing our properties well above market value is, without a doubt, far greater than any capital losses we might incur by adjusting our prices to match current demand.
To quote Henry Ford once again: Failure is a great opportunity to start again, but this time more wisely. Today it’ll be the bursting of the property bubble, tomorrow a stock market crash, the day after that hyperinflation with oil at 200$, or deflation itself… We will always have excuses for resignation and defeatism, for cowardly condemning ourselves to investment ostracism. But our wealth growth must continue despite the difficulties, and this is absolutely incompatible with the pessimism about the property market which prevails in our time.
The show must go on
I’ll face it with a grin
I’ll never give in
Let the show go on